In search of foreign investors

In his National Day speech in early October, Taiwan's president, Ma Ying-jeou of the ruling Kuomintang, set out an economic agenda that included lowering barriers to foreign investment as a priority. Despite the island's attractive legal and business environment, growth in foreign direct investment (FDI) in Taiwan has plateaued in recent years. The stock of inward FDI reached US$56.2bn in 2011, barely up from US$50.2bn in 2006. This was dwarfed by Taiwan's stock of outward FDI, which reached US$213bn in 2011, representing a sharp rise from US$120bn five years earlier.

The government has begun to flesh out the strategy announced by Mr Ma last month. In early November it launched a two-year inbound investment drive, committing itself to cutting tariffs on imports of equipment and machinery, offering support to investors through bridging loans and with land acquisition, and simplifying administrative procedures. A plan to exempt projects involving foreign investment of less than US$1m from official screening prior to implementation is under consideration. In addition, specific projects have been touted to investors; they include a major upgrade of Taiwan's main international airport complex, Taoyuan Aerotropolis, and a software and precision-machinery park in the centre of the island.

More controversially, the government is also considering relaxing immigration controls in order to attract investors. It has proposed that foreign-worker quotas for companies operating in a number of industrial and manufacturing sectors be increased by up to 15% from current levels. This will allow some firms to source up to 40% of their workers from overseas. The government estimates that Taiwan's population of migrant workers, who are predominantly South-east Asian, will grow from 440,000 to 520,000 as a result. A requirement for foreigners holding permanent residency to live on the island for at least 183 days a year is to be removed, and will be replaced with a much looser stipulation that permanent residency rights will only be revoked if the holder has left the country for a period of over five years. The authorities are also considering granting residency rights to mainland Chinese who make sizeable, job-creating investments.

Welcome home

Although such incentives may offer something to a range of investors, the government has stated that its main aim is to attract back local companies that have moved production capacity away from Taiwan, largely to mainland China, in the past two decades. Benefiting from cheap Chinese labour and direct access to the mainland's vast market, some of these firms have become enormously profitable. However, the comparative advantages gained from locating in mainland China are gradually diminishing. Land and labour costs there are rising rapidly, particularly in the coastal provinces, such as Jiangsu and Fujian, where Taiwan companies are concentrated. In addition, the liberalisation of trade relations across the Taiwan Strait has removed impediments to the export of goods to mainland China from Taiwan. According to Taiwan's Ministry of Economic Affairs (MEA), the total investment stock of Taiwan-headquartered companies returning from mainland China has grown from less than NT$5bn (US$170m) in 2006 to over NT$45bn in 2011.

The government's latest FDI initiatives indicate that it wants to support this "homecoming" trend. The proposal to boost the number of foreign workers, for example, is designed to address concerns that Taiwan lacks an adequate supply of labour. The island's relatively highly skilled and well-paid workforce has little appetite for work in low-level manufacturing sectors. Bringing in overseas workers provides a potential means to compensate for the shortage, and represents a source of cheaper labour. According to the Council of Economic Planning, foreign employees in a series of planned "free economic demonstration zones", the first of which will open in the southern city of Kaoshiung in 2013, will even be exempt from minimum-wage legislation. The government is looking to address other concerns voiced by investors. The premier, Sean Chen, recently said that the island's environmental-protection laws ought to be revised, as they currently place excessively obstructive limits on heavy-industry and petrochemical projects.

Incentives, not a strategy

Such measures may help to lure some companies back to the island, and this would provide a boost to job creation and economic growth. However, they might not attract the kinds of firms that would be beneficial for Taiwan's longer-term development. Promises of low wages will appeal primarily to labour-intensive industries rather than innovative, capital-intensive manufacturers of high value added products. In its current formulation, the government's FDI strategy therefore appears to run contrary to its broader goal of modernising Taiwan's industrial structure and shifting away from the low-margin contract manufacturing in which the island has specialised. According to the MEA, the firms that have returned to Taiwan from mainland China in recent years operate primarily in sectors such as textiles and electronics, which is hardly an encouraging sign of restructuring.

Taiwan's advantages as an investment destination include its developed industrial clusters and supply chains, its well-educated workforce and its dynamic private sector. The island has also done much to improve its business environment: Taiwan is ranked 16th globally in the World Bank's Ease of Doing Business index for 2013, up from 25th a year earlier. The government therefore has sufficient assets to showcase to investors without offering additional incentives in the area of cost. An FDI strategy more tightly focused on industrial upgrading, and on investment in the island's transport and communications infrastructure, would be likely to prove more compelling. The gradual opening of sectors in which foreign investment (including flows from Taiwan expatriates) is not currently encouraged, such as healthcare, education, financial services and telecommunications, would also help to stimulate interest. Taiwan is determined to bring in more FDI, but under the current direction of policy it may struggle to attract the right sort.